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Government and the Publicly Accountable Enterprise

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Government and the Publicly Accountable Enterprise

Government and the Publicly Accountable Enterprise

How citizens are defining the next age of intervention

An explosion of mobile communications and social media is empowering citizens to define the next age of intervention and set new standards for public accountability. The light of transparency has never been brighter nor has the tolerance for misinformation ever been lower.

Written by

Paul Macmillan

Published

July 1, 2011

The global financial crisis that began in 2007 has brought significant government intervention in developed countries worldwide. Financial system reforms, stimulus spending and direct capital infusions were just some of the initiatives deployed to stave off an even deeper recession. While these efforts have enjoyed some success, in many parts of the world the economic slowdown is far from over. Governments remain watchful over their economies. Seeking to avoid another meltdown, they are working to rebalance the state of deregulation begun in the Thatcher-Reagan years.

While the level of economic stimulus and regulatory intervention was unprecedented, it has accompanied a more fundamental shift in the public landscape – one that may have further reaching and longer lasting implications for how businesses are governed and managed. An explosion of mobile communications and social media is empowering citizens to take hold of the public agenda. Mobile devices and social media are effectively ubiquitous – 35 hours of video are being loaded onto YouTube every minute. In addition, social media have arrived as a legitimate source for news: According to a recent survey of more than 1,000 business journalists from over 35 countries, 90 percent source news from social media, far outstripping reliance on direct information from companies (21 percent) and analysts’ research (13 percent).1 While leading corporations understand the value of marketing through social media, the phenomenon comes with a price: The light of transparency has never been brighter nor has the tolerance for misinformation ever been lower.

With connectedness comes empowerment. WikiLeaks has received millions of documents from citizens eager to expose government and corporate secrets. As events in North Africa and the Middle East have shown, the political terrain can change rapidly when aided by the flow of news and information. But it is not just autocratic dictators that are impacted. Properly elected governments, global CEOs and iconic brands also face a new reality: Citizens are defining the next age of intervention and setting new standards for public accountability.

At the same time, citizen confidence in government and business has been shaken. Insider trading, Ponzi schemes, mortgage meltdowns, collapsing banks, product recalls and oil spills have convinced people that more active monitoring is needed. In response, legislation like Sarbanes-Oxley, and more recently the Dodd-Frank Wall Street Reform and Consumer Protection Act, have institutionalized corporate whistle-blowing. And while business and finance become more globally interconnected, the limits of national autonomy become more evident. The citizens of Iceland, Ireland, Greece and Portugal have come to appreciate how the demands and limitations of global financial markets can impact national economies.

Citizens are creating an atmosphere of transparency and accountability that goes well beyond traditional notions of corporate social responsibility. Boards of directors and executive management are under pressure to exercise broader accountability to the public. In matters of ethics and integrity, the line between shareholder and citizen expectations has all but disappeared. What justification, for example, would shareholders or citizens accept for doing business with corrupt dictators or with suppliers employing child labor? These issues now play out on a very public stage, with rapid consequences for marquee brands.

The evolution of intervention

Like many relationships, government, business and the economy have a long and sometimes stormy history. The creation of central banks to manage monetary policy; the establishment of crown agencies to provide critical infrastructure; the formation of the IMF, World Bank and European Union; and the introduction of regulated stock exchanges all indicate government’s evolving role. In fact, there have been a number of distinct ages of intervention since the Great Depression.

The fault lines for the new age of public accountability can be traced to the beginning of the 21st century. The terrorist attacks of September 11, 2001 resulted in increased powers for governments to access personal information held by corporations. A series of well-publicized accounting scandals opened the door to governments strengthening corporate oversight. Defaulting financial institutions set governments on a path to define “too big to fail.” Yet, perceived lax oversight of offshore drilling, widely criticized responses to natural catastrophes like Hurricane Katrina and the earthquake in Haiti, and a host of other challenges have cast governments, too, in an unfavorable light. Who is accountable when an offshore rig explodes? Or when financial products become so complex that neither traders nor regulators can understand them? In the past, a few investigative reporters would doggedly work to uncover the truth. Today, anyone with Internet access and a mobile phone has the potential to become a field reporter or government watchdog.

National economy building 1920s-1930s

International cooperation 1940s-1950s

Oil crisis 1960s-1970s

The retrenchment 1980s-1990s

Public accountability 2000 and beyond

1929 stock market crashDepression and post-Depression

Second World War and recovery

Oil crisisStagflation

New public management and deregulationOil glutBlack Monday (1987)Early 90s
recession

Dot-com crash2000-’02 market crashEnron9/112007 financial crisis

U.S. bank failures, Glass–SteagallAct of 1933, establishment of the Federal Deposit Insurance CorporationU.S. and retaliatory tariffs impact international tradeFormation of public utilities and institutions:- Canadian Wheat Board- Canadian Broadcasting Corporation (CBC)- Bank of Canada- Ontario Securities Commission

High government spending on large scale rearmamentReduced unemployment; doubled economic growth ratesEstablishment of General Agreement on Tariffs and Trade (predecessor to WTO)Formation of:- The International Monetary Fund- The World Bank- The European Union

High oil prices cripple western economiesU.S. wage and price controlsU.S. deregulation of airlines and truckingFormation of:- OPEC and G7- Canada Development Corporation

Sharply increased interest rates from 1979-1983 to the highest rate in historyIncreased market orientation by government (New Public Management)Privatizations: Air Canada and Petro-CanadaBank deregulation in the U.S.Revisions to Canadian Bank Act,permit bank subsidiaries in various financial servicesEstablishment
of National
Energy ProgramNorth American Free Trade Agreement

Introduction and gradual mass use of personal
computersBirth of the WebGrowth of 24-hour news (CNN)Embedded journalists (First Gulf war)Y2K

Canadian Internet use: 42% in 2000 to 75.3% in 20080.5-1.35 billion mobile phone subscriptions in OECD countries (2000-2007)Facebook
100-400 million users (2008-2010)Twitter (4 billion tweets in the first quarter of 2010)

The mainstreaming of social media

Social media have taken government and business scrutiny to a new level, with citizens mobilizing in ways previously unimagined by traditional government and business institutions. Sites like Facebook and Twitter have become a cultural phenomenon and let people organize and share information at a pace and scale never before seen. More significantly, they are a powerful tool for social change, giving the public the ability to build or destroy company reputations and influence government actions. On a single day, Saudi stock markets dropped 7 percent on fears that numerous “Facebook groups” were mobilizing protests across the region.2 Social media’s global reach and pervasiveness subject governments and businesses to unprecedented transparency and public accountability by spreading information faster to more people than was ever imaginable before.

Social media on a roll

A 2010 study of CNN’s international audience showed 43 percent of all online news sharing takes place through social media networks and tools.3

Twitter membership grew by 1,882 percent from Feb 2008 to 20094 and in June 2010 reached 190 million visitors per month, generating 65 million Tweets a day.5

These forces create a context for citizen intervention unlike anything we have seen. When WikiLeaks reported it was holding potentially damaging information on some of the largest banks, stock markets took note.6 Given the media attention when information was released on diplomatic messages, it was not hard to imagine the reputational damage that the banks might suffer if such corporate records were released. Neither governments nor businesses can operate as they have in the past. Both are subject to global forces that are blurring the lines between private enterprise and public accountability.

In previous intervention ages, businesses needed to be concerned about their direct operations and maybe their impacts on direct suppliers and customers. Today, the second, third and even fourth order consequences of their decisions are important, and these impacts can occur all over the globe.

The new age of intervention demands unparalleled public accountability. When the U.S. federal government introduced its massive $787 billion stimulus package with the 2009 American Recovery and Reinvestment Act, it recognized this and immediately set up Recovery.gov, a Web site dedicated to reporting on stimulus spending. The goal of the site was unparalleled transparency regarding where money was being spent and what was being achieved. In addition to project status information, including funding recipients, the site lets citizens report waste, fraud and abuse, mobilizing millions of potential citizen watchdogs.

Conventional business risks can be magnified by the potential for public intervention – whether by governments or citizens. Public risks can emerge without warning and rapidly go viral. Understanding and adapting to these risks requires an ability to see beyond the bottom line and to understand how citizens and governments may view corporate actions.

In previous intervention ages, businesses needed to be concerned about their direct operations and maybe their impacts on direct suppliers and customers. Today, the second, third and even fourth order consequences of their decisions are important, and these impacts can occur all over the globe. When poor labor practices of Foxconn Technology, Apple’s China-based supplier of components for iPhones, came to light and then went viral, Apple recognized the scope of the problem and acted quickly. Reports that the suicide rates among the one million people working for Foxconn in China were similar to the national average added to the urgency of the situation. A third-party report into labor practices across its China supplier network allowed Apple to identify and acknowledge a number of problems, while outlining the corrective actions being taken.7 The working conditions in Chinese plants would not have gone viral without cell phones and the Internet. Citizens on the ground are likely more vigilant watchdogs than any government inspectors – and they don’t necessarily heed diplomacy or borders in utilizing the new tools of public accountability.

What the future holds

While the nature of government intervention tends to change with elections and watershed events, the implications of the age of public accountability are still evolving. But a number of trends seem highly probable, at least in the medium term.

First, governments will likely embrace a stronger regulatory role. This trend will probably be driven by stressed governmental budgets and a perception that businesses need to be held accountable.

The momentum of deregulation appears to have slowed, and governments seem poised to probably take a stronger role in everything from financial systems to environmental protection. With the ability of markets to self-correct or self-regulate in considerable question, governments will likely play an active role in managing global, national and—as seen in the case of energy production – even site-specific risks. Increasingly, instead of prescribing specific courses of action, governments are providing businesses with a set of expectations. This broader, outcome-based regulatory approach places increased responsibility on businesses to do the right thing in relation to both the intended and unintended consequences of their actions.

From a government agency perspective, austere times suggest that government agencies with the strongest economic, security, environmental protection and health-related mandates are likely to compete successfully for scarce government resources. Once funded, the agencies will likely face demands for increased transparency and a climate of public accountability, making it imperative that they show results by clearly enforcing compliance.

Second, greater public disclosure of corporate information will probably ensue. As privacy becomes a scarce commodity among citizens, there will likely be decreasing acceptance of walls thrown around corporate activities. Whether this scrutiny is “deserved” or “excessive” is a matter of politics and perspective, but the underlying reality is that more corporate information will likely become available to more people. In this scenario, the decision may not be one of how to lock down information so much as to how and when to present it, and in what venues. The recent decision by the U.S. Federal Reserve Board to release over 25,000 pages of documents showing which banks had used its discount window between 2007 and 2010 is an example of vaults of corporate information held by government agencies being unlocked.

Last, near-term agendas are expected to take precedence over big policy ideas. In the context of regulatory legislation, the methodical machinery of government has historically resulted in legislative and regulatory change only after extensive study. Governments, however, have become increasingly unlikely to spend years analyzing major policy changes. Cycle times have gone from years to months.

Nor do governments tend to rely on existing regulatory models to address new challenges. Citizens, special interest groups and politicians are coming to expect—and influence—more responsive policymaking. The good news is that feedback on government and business decisions is almost immediate. But it is challenging for a leader to persevere with a long-term plan when faced with short-term resistance. While this has led to more responsive government, it may well come at the expense of longer-term public policy solutions.

Navigating the new public landscape

Like most business transformations, a key to success will be cultural change, in this case with a particular focus on building a culture of public accountability. This involves encouraging staff to understand the publicly transparent environment in which business is conducted today and the speed at which reputations can be ruined and value eroded by poor decisions. Businesses need to be even more vigilant about what behaviors they want to be associated with, with responsibility for this vigilance recognized and shared throughout the organization.

There are specific actions that can improve a company’s chances of successfully navigating the new public landscape.

Expand your understanding of public risk. Businesses need to expand their risk management responsibilities beyond regulatory compliance. Regulators, shareholders and citizens expect managers to promote public accountability throughout the enterprise and across the value chain. When Goldman Sachs was faced with political and public criticism in the aftermath of the subprime mortgage crisis, it established a Business Standards Committee to advise the board of directors with regard to the firm’s products and services and how they were viewed by citizens. At an investor meeting, Chairman and CEO Lloyd Blankfein said that there had been a disconnect between how the company viewed itself and how citizens perceived it.8

Look at the larger public picture.Boards and management must be mindful that repercussions of business actions can go beyond traditional business boundaries. By taking responsibility for a potential food contamination emergency and responding immediately, for example, a company may help maintain confidence in the broader public health system while identifying where corporate improvements might be needed. A company’s decision to own the problem may prevent potentially counterproductive government action in a heated political climate.

Test compliance systems. Intense public scrutiny and a related demand for transparency are both on the rise. Consider worst-case scenario planning to stress-test not just corporate performance, but where broader public interests could be at risk. Contingency and disaster recovery plans should be updated to reflect the challenges of operating under increased public accountability. Obviously you don’t want to do this by creating a crisis, but it can be simulated to create an instructive exercise.

It is important to stretch the boundaries in envisioning what a crisis might become in order to prepare. War gaming, for example, is a methodology that attempts to find and mitigate the weakest links in an organization. It is an organizationwide, pre-emptive, focused approach to test and validate how an organization will react to intense regulatory or public scrutiny. If a YouTube video is posted of an employee asleep on the job, how would you react? If four or five videos are posted on the same day of employees in different cities, what would you do? While a sleeping employee is (usually!) not a crisis, to an online media-addicted culture it can be an easily digestible mini-scandal.

Simulations can test the response plans of multiple agents within an organization as they react to pressure from regulators, consumers, politicians, investors and the media – all while complying with statutory obligations. Such testing can also uncover the strengths of the underlying and sometimes unstated assumptions and principles behind business strategies, revealing organizational biases that could undermine responsiveness to external pressures.

Collaborate with policymakers. Governments are under intense public scrutiny to address increasingly complex challenges – assessing and managing system risks on a global scale and identifying and managing enterprises that are “too big to fail,” for example. The scope and complexity of these and other risks will probably force business and government to collaborate intensively to meet public expectations and avoid catastrophic failures.

Governments make better decisions when they have a clear understanding of specific industries, issues and concerns. By moving from compliance to collaboration, directors can facilitate a dialogue between government and business that clarifies public issues for both. This is distinct from lobbying, which is often about advocating or influencing the specifics of a specific law or agency decision.

One way to enable this is for the board to include some members who have worked on the government side and therefore have an appreciation of how government agencies think and act. Without this competency, boards can fail to understand the complexity of government decision-making and how companies can best contribute to policy and regulatory processes.

Develop a culture of public accountability across the enterprise. Encourage executives and staff to think like citizens – rather than exclusively as shareholders or customers. Citizens are much more empowered today to hold businesses publicly accountable. What was once regarded as an acceptable corporate response to safety or other issues may not be today; and what’s accepted today may not be tomorrow. Given the real risks of public outcry in the social media age, directors would be well served to monitor the pulse of core societal concerns to protect both the public interest and shareholder value.

At all levels of an organization, however, it is increasingly important for employees to understand and adapt to changing expectations on the part of governments and citizens. What are the potential implications of a particular course of action? If later called upon to explain our decisions, are we comfortable presenting our rationale to the public? Is there clarity within the organization as to how public accountability shapes our decisions? Among directors and management, there may be significant benefits realized in an environment where the potential public outcomes of business actions can be debated.

Citizens, as much or more than governments, are defining the new age of intervention. Empowered and connected, they are shaping a public agenda that holds business and government accountable like never before. Embracing this new age of public accountability is critical to navigating successfully in the future.

Schonfeld, Erik. “Costolo: Twitter now has 190 million users tweeting 65 million times a day.” Techcrunch. June 8, 2010. http://techcrunch.com/2010/06/08/twitter-190-million-users/ Web. November 23, 2010.

Cover Image by Brian Stauffer

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